Download Infrastructure - Debt and Equity Investments for UK Insurers

5/27/2014
Global Insurance Asset Management
Infrastructure – Debt and Equity Investments for
U.K. Insurers
Risk and Investment Conference 2014
Etienne Comon, Valerie Stephan
Goldman Sachs Asset Management
June 2nd 2014
For professional investors only - Not for further distribution to the general public
Activity of U.K. Insurers in
Infrastructure
A i Friends
Aviva,
F i d Lif
Life, Legal
L l & General,
G
l Prudential,
P d ti l Scottish
S tti h Widows,
Wid
andd Standard
St d d Life
Lif
will work alongside partners with the aim of delivering at least £25 billion of
investment in UK infrastructure in the next five years. Suitable projects will include, but
not be limited to those included in the National Infrastructure Plan 2013 and can include
major infrastructure projects led by private sector sponsors
“The UK insurance growth action plan”, HM Treasury, December 2013
Aviva announces that it is making an
immediate allocation of £500 million to
invest in UK infrastructure projects. […]
Aviva expects to allocate new funding for
debt financing of UK infrastructure
projects
Aviva, December 2013
Pension Insurance Corporation invests
£74m in second Manchester social
housing PFI bond
PIC, January 2013
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Key Questions to U.K. Insurers
g needs
Funding
Insurance
balance sheet
 What are the financing needs of infrastructure projects?
 What type of infrastructure?
 What type of infrastructure assets could fit
—An annuity book
—A with-profits fund
Debt
 What is today the value of infrastructure debt relative to
other types of credit ?
Equity
 Can infrastructure equity complement a with-profits or
P&C listed equity portfolio?
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1
Infrastructure Investment Needs
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Global Infrastructure Investment
Needs
Annual infrastructure investment needs 2009-2030
2009-2015
2015-2030
Oil and Gas Transport &
Distribution
Rail ‘New
Construction’
Source: Source: OECD –
Infrastructure to 2030: Telecom,
Land Transport, Water and
El t i it ; OECD Oli
Electricity
Oliver
Wyman – Strategic Transport
Infrastructure Needs to 2030
Port Infrastructure
Facilities Capital
Expenditure
Airports Capital
Expenditure
$0bn
$50bn
$100bn
$150bn
$200bn
$250bn
$300bn
5
Realized Infrastructure Investments
Infrastructure investments made 2007-2013
$400bn
Reported Aggregate
Deal Value ($bn)
$300bn
Estimated
Aggregate
Deal Value ($bn)
$200bn
$100bn
$0bn
2007
2008
2009
2010
Source: Preqin infrastructure transaction activity report, February 2014
2011
2012
2013
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Types of Infrastructure Projects
Transport
Social
 Airports
 Education
 Ports
P t
 Healthcare
 Rail
 Accommodation
 Roads
Telecom
 Broadcast towers
 Cable operators
 Mobile towers
Renewable energy
Utilities
 Windfarms
 Electricity & gas transmission
 Solar
 Water
Source: Preqin infrastructure transaction report February 2014 – shows deal % 2008-2013
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Types of Infrastructure Projects
U.K. Infrastructure Plan
Projections:
 2014/15: ₤36bn
Other
 2015/16: ₤39bn
Energy
transmission/dist
ribution/storable
Rail
Renewables
Roads
Airport/port
Communications
Water
Source: National Infrastructure Plan 2013 – sum of projected infrastructure investments for years 2014/15 and 2015/16
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Regional Split
100%
Europe
North
America
75%
Asia
Australasia
50%
Latin America
Other
25%
0%
2008
2009
2010
2011
2012
2013
Source: Preqin infrastructure transaction activity report, February 2014
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Investment Needs – Conclusion
Large infrastructure investments will need to be
financed over the next ten years
Europe represents more than 40% of projected
infrastructure needs
The entire infrastr
infrastructure
ct re value
al e chain m
must
st be
considered – not just the operators of infrastructure
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2
An Insurance Balance Sheet
Perspective
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Investment Considerations
Equity vs. debt
Listed vs. private
Fund vs. single
assets
Debt specific
criteria
Equity specific
criteria
 Liability matching vs. income generation
 Tradeoff between illiquidity premium and flexibility
 Asset diversification objectives
 Investment and risk constraints
 Ranking in capital structure and rating
 Prepayment risk
 Potential for coinvestment
 Fund structure (open end vs. close end)
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Annuity Perspective
Insurance and reinsurance undertakings may apply a matching adjustment […] where the
following conditions are met: […]
(c) the expected cash-flows of the assigned portfolio of assets replicate each of the expected cashflows of the portfolio of insurance or reinsurance obligations
(h) the cash-flows of the assigned portfolio of assets are fixed and cannot be changed by the
issuers of the assets or any third parties […]
(c) the fundamental spread shall be increased where necessary to ensure that the matching
adjustment for assets with sub investment grade credit quality does not exceed the matching
adjustments
dj t
t ffor assets
t off iinvestment
t
t grade
d credit
dit quality
lit
Source: Council of the European Union, November 2013
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Annuity Perspective
Insurance and reinsurance undertakings may apply a matching adjustment […] where the
following conditions are met: […]
(c) the expected cash-flows of the assigned portfolio of assets replicate each
of the expected cash-flows of the portfolio of insurance or reinsurance
obligations
(h) the cash-flows of the assigned portfolio of assets are fixed and cannot be changed by the
issuers of the assets or any third parties […]
(c) the fundamental spread shall be increased where necessary to ensure that the matching
adjustment for assets with sub investment grade credit quality does not exceed the matching
adjustments for assets of investment grade credit quality
Long-dated cash flows matching
liabilities
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Source: Council of the European Union, November 2013
Annuity Perspective
Insurance and reinsurance undertakings may apply a matching
adjustment […] where the following conditions are met: […]
(c) the expected cash-flows of the assigned portfolio of assets
replicate each of the expected cash-flows of the portfolio of
insurance or reinsurance obligations
(h) the cash-flows of the assigned portfolio of
assets are fixed and cannot be changed by the
issuers of the assets or anyy third p
parties […]
No call option
– or appropriate
call protection
(penalty, make
whole) needed
(c) the fundamental spread shall be increased where necessary to
ensure that the matching adjustment for assets with sub
investment grade credit quality does not exceed the matching
adjustments for assets of investment grade credit quality
Source: Council of the European Union, November 2013
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Annuity Perspective
Investment grade bias
Insurance and reinsurance undertakings may apply a matching adjustment […] where the
following conditions are met: […]
(c) the expected cash-flows of the assigned portfolio of assets replicate each of the expected cashflows of the portfolio of insurance or reinsurance obligations
(h) the cash-flows of the assigned portfolio of assets are fixed and cannot be changed by the
issuers of the assets or any third parties […]
(c) the fundamental spread shall be increased where necessary to ensure
that the matchingg adjustment
for assets with sub investment grade
credit
j
g
quality does not exceed the matching adjustments for assets of investment
grade credit quality
Source: Council of the European Union, November 2013
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Annuity Perspective
 Debt financing of infrastructure appears to be an appropriate fit:
— Long
Long-dated
dated (12y+ duration)
— Fixed coupon, or floating-rate coupon hedged to fixed
— External or internal rating often in BBB to A- range
 But structuring challenges must be addressed:
— Callability
— Fixed vs. floating
g coupon
p ((management
g
of interest rate swap
p overlays)
y )
— Implementation format
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With-Profits Perspective
With-profits investments (non fixed income instruments)
60%
Increased
off equity
I
d diversification
di
ifi ti
it
backing ratio
50%
40%
Property
30%
Unlisted equity
20%
Overseas listed equity
10%
U.K. listed equity
0%
2005
2006
2007
2008
2009
19
Source: FSA returns, 2005-2009.
With-Profits Perspective
 Greater flexibility available to with-profits funds across
debt and equity
q y investments
Flexibility
Infrastructure equity investments for with-profits funds
Diversification
Alpha generation
Risk
 Beyond the diversification to overseas equities, further
diversify the exposures of the equity backing ratio
 Deliver excess returns over listed equity universe
 Achieve greater risk-adjusted returns relative to listed
equity benchmarks
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Debt
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Access to Debt Financing is Not
Currently a Constraint
Infrastructure fund managers’ views on the availability of debt financing for
infrastructure assets
Unsure
Better than
12m ago
Source: Preqin infrastructure transaction activity report, February 2014
Worse than
12m ago
Same as 12m
ago
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Who are the Providers of Debt
Financing for Infrastructure?
Infrastructure fund managers’ views on the expected primary source of debt
financing for infrastructure assets in 2014
Unlisted
infrastructure
debt funds
Other
Institutional
investors
Banks
Source: Preqin
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Bank Debt Financing Does Not
Appear to Decline
Global project finance volume
Bank lending
$300bn
Other
$200bn
$100bn
0
1997
1999
2001
2003
2005
2007
2009
2011
Source: Standard & Poor’s, 2013
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Bank Capital Perspective: Should
Banks Lend Less to Infrastructure?
Risk weighted assets
 Leverage ratio
introduces a “return on
assets” metric in
addition to a “return on
capital / RWA” metric.
100%
Risk weight
Leverage
75%
50%
25%
Liquidity & funding
 Net Stable Funding
Ratio (NSFR) to be
monitored from 2015,
in-force in 2018
 Long-term illiquid
assets must be funded
with long-term
liabilities
0%
AA
A
BBB
Rating
NSFR and leverage ratios are important priorities for banks
Source: Standard & Poor’s, 2013
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Increased Supply of Financing by
Infrastructure Debt Funds
Unlisted infrastructure debt funds in market over time (Jan06-Jan14)
25
$15bn
$10bn
20
Number of
funds (right
axis)
15
Target capital
(left axis)
10
$5bn
5
$0bn
0
2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Preqin 2014 global infrastructure survey
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Infrastructure Debt Supply is
Particularly Strong in Europe
Breakdown of debt/mezz infrastructure funds by primary geographic focus
$10bn
Europe is the main beneficiary of
new infrastructure debt financing
Ta
arget capital
$8bn
$6bn
$4bn
$2bn
$0bn
Source: Preqin
North
American
Europe
Asia
Rest of
the world
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GSAM Annual Survey of
Insurance CIOs and CFO
Are you
planning to
increase
increase,
decrease, or
maintain your
allocation to
the following
asset classes
in the next 12
months?
Infrastructure debt
Real estate
EM equities
Commercial mortgage loans
Private equity
U.S. equities
q
(Results for
European
participants
only)
EM debt (corporate)
U.S. corporates
20%
Source: GSAM Insurance Survey, April 2014
10%
Decrease
-
10%
Increase
20%
30%
40%
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Formats of Debt Financing
Public markets
Private markets
Retain investment flexibility with
liquid securities
Seek to monetise illiquidity
premium where significant
Bespoke structure matching
annuity constraints
Corporate bonds
Private placements
PFI bonds
Infrastructure loans
Securitization (incl. whole business)
U.S. taxable municipal bonds
29
U.K. PFI Bonds
Example spread profile of PFI Bonds
Individual PFI
bonds
LIBOR spread
200bps
Barclays ₤ corp
non-financials
100bps
0bps
AA
A+
A
A-
BBB+
BBB
Not rated
Source: GSAM ; market data as of 16 May 2014
In the absence of a reference index, sample PFI bonds are presented above (Integrated Accommodations, Annes Gate, Exchequer Partnership,
Connect M77, Derby Healthcare, NATS, Ctrl Section, Octagon Healthcare, RMPA Services, Aspire Defence, Progress Health, Merseylink,
High speed rail, Greater Gabbard, Scot Roads Partnership)
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Private Infrastructure Debt
 Illiquidity premium in infrastructure loans has significantly
decreased (to 25bps–50bps today) relative to public
markets
Illiquidity
p
premium
Diversification
 Greater sector and geographic diversity may be
achieved with directly originated loans – but public
issuance recently increased in regions historically
available only through loans (e.g. Belgium, Slovakia)
 Significant credit / legal complexity in private
infrastructure debt deals
Complexity
Pace of funding
 Direct origination takes time to complete ; portfolio
diversification requires a large number of deals
 Unfunded loan commitments
Format
31
Alternative Infrastructure Debt:
U.S. Taxable Municipal Bonds
Municipal bonds
Tax-backed
Revenue
State GO
County GO
Transportation
Hospitals
City GO
Dedicated tax
Universities
Utility
42% of municipal market
58% of municipal market
 Typically backed by the full faith, credit
and taxation power of the issuer. Taxes
can be from income, sales or excise, while
most counties and cities tend to rely on
property taxes for payment of the GO
bonds.
 Issued to fund specific projects (i.e.
bridges, toll roads, colleges) and a portion
of the revenue generated from these
projects is used to pay the interest and
principal of the bonds.
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Alternative Infrastructure Debt:
U.S. Taxable Municipal Bonds
Case Study: San Francisco Bay Area Toll Authority (BATA)
g in the Bay
y Area.
 Bonds are backed byy g
gross toll revenues from seven bridges
 BATA operates, maintains, and administers tolls on seven State-owned
bridges in the Bay Area (excluding the Golden Gate Bridge).
 Ratings: Moody’s - Aa3/Stable, S&P - AA/Stable, Fitch - AA-/Stable
Traffic breakdown from the bridges
Revenue / debt service profile
$800m
3.0x
Richmond
San Mateo
2.5x
$600m
2.0x
Dumbarton
Benicia
Antioch
1.5x
$400m
1.0x
$200m
0.5x
SF Oak Bay
Carquinez
0.0x
$0m
FY 08
FY 09
FY 10
FY 11 FY 12
Pledged Revenues (Left Axis)
FY13p FY14p FY15p FY16p
Debt Service Coverage (Right Axis)
Source: GSAM, as of April 2014
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Alternative Infrastructure Debt:
U.S. Taxable Municipal Bonds
Sources of financing for revenue taxable municipals
Education
Transportation
Energy
transmission
Housing
Water
Other
Hospital
Ports
Source: Bloomberg ; GSAM calculations. As of May 2014
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Alternative Infrastructure Debt:
U.S. Taxable Municipal Bonds
Maturity profile
16%
Average maturity
14%
2036
Rating mix
Average rating
40%
AA-
12%
30%
10%
8%
20%
6%
4%
10%
2%
0%
2014
0%
2024
2034
2044
AAA AA
A
Sources: (1) Barclays taxable municipals index, as of April 2014 ; (2) Bloomberg, as of April 2014
BBB HY
35
Alternative Infrastructure Debt:
U.S. Taxable Municipal Bonds
Historical default rates (10y cumulative since 1970)
25%
20%
15%
10%
5%
0%
AAA
Source: Moody’s Report from May 7, 2013.
AA
A
BBB
BB
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Alternative Infrastructure Debt:
U.S. Taxable Municipal Bonds
Spread / duration profile
Current spread & duration
OAS
400bps
OAS
Duration
AAA
85bps
11.0y
AA
115bps
11.8y
A
162bps
10.3y
BBB
319bps
9.6y
200bps
fi
i l
£C
Corp AA nonfinancials
£ Corp A nonfinancials
£ Corp BBB nonfinancials
Taxable municipals
0bps
May06
May07
May08
May09
May10
May11
May12
May13
May14
Source: Barclays Capital. Market data as of 30 April 2014
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Debt – Conclusion
Infrastructure debt has an attractive maturity and
credit profile for a U.K. annuity fund
Bank funding remains strong, while vast amounts of
new capital are deployed by pension/insurance
Very tight credit spreads on infrastructure debt
The U.S. taxable municipal bond market can be used
as an alternative to European infrastructure loans
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4
Equity
39
Europe – Key Themes
Competition for
assets
Macro risks
Regulatory risk
 Particularly strong competition for core infrastructure
assets in Western Europe
p where auctions are the norm
 Secondary sales
 Reduced macro risk in the Euro periphery
 In certain countries and in certain sectors, fear of
reg lator cliff risk (e
regulatory
(e.g.
g Gassled,
Gassled Spanish renewables)
rene ables)
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North America – Key Themes
 Shifting balance of world economic growth
Macro
 Mexico GDP growth is expected to rebound in H2 2014
 Record IG and leveraged finance issuance
Liquidity
Political & fiscal
 State and local governments continue to feel fiscal
pressure
Energy
transportation
 Need for midstream and transmission infrastructure
Renewables activity remains strong
 Underinvestment in transportation infrastructure
Transportation
 PPP activity picking up (LaGuardia, Midway, etc.), but off
of a low base and dominated by greenfields
 Riskier freight-based core sectors (rail and ports)
41
Listed Infrastructure Equity
Stable Underlying EBITDA
EBITDA growth of global infrastructure vs. global equities
Year-o
on-year EBITDA growth
+20%
+15%
+10%
Global Infra
+5%
Global Equity
-5%
-10%
-15%
Source:, GSAM, World Economic Forum. Global Infrastructure / Global Equities as measured by the EBITDA growth of constituents of Dow Jones
Brookfield Global Infrastructure index / MSCI World index, respectively. Past performance does not guarantee future results, which may vary
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Listed Infrastructure Equity
Leverage is made possible by stable
cash flows
Comparison of gearing across industries
Net Debt/ EBITDA
FY11
FY12
FY13
Infrastructure & Utilities
4.0x
4.5x
4.2x
Infrastructure
4.1x
5.5x
4.4x
Utilities
4.0x
4.3x
4.1x
MSCI World
3.7x
3.6x
3.1x
Source: GSAM, World Economic Forum, as of Q1 2014
. Any reference to a specific sector or security does not constitute a recommendation to buy, sell, hold or directly invest in the sector or its
securities. It should not be assumed that the recommendations made in the future will be profitable or will equal the performance of the securities
discussed in this document. Past performance does not guarantee future results, which may vary
43
Listed Infrastructure Equity
However, dividend yield remains high…
Historical dividend yield of infrastructure equity vs. overall equity universe
6.0%
5.0%
UBS World Infrastructure & Utilities
Divvidend yield
4.0%
3.0%
MSCI World All
2 0%
2.0%
1.0%
0.0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 ‐
YTD
Source:, GSAM, Bloomberg, UBS, MSCI, FactSet. Market data as of Q1 2014. Past performance does not guarantee future results, which
may vary
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Listed Infrastructure Equity
… and equity beta low
Equity beta of listed equity sectors (2004-2014)
Financials
Materials
Industrials
Energy
Cons. discretionary
IT
S&P
UBS
Dow Jones
Macquarie
Telecommunications
Listed infrastructure
equity
q y
Healthcare
Utilities
Cons. staples
0.0
0.5
1.0
1.5
Beta to S&P 500 index
Source: GSAM. Market data as of May 2014. Beta calculated based on weekly returns over the May 2004-May 2014 period
45
Private Infrastructure Equity
Historical Returns
Exit rates of return showing the size, and dates, of equity sales
Source: National Audit
Office, “Equity
investment in privately
financed projects”
70
60
50
Percentage
40
30
20
10
0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Date of sale
£25 million
Single deals
£5 million
£1 million
Multiple deals
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Private Infrastructure Equity
Historical Returns
Historical returns of private infrastructure equity funds
30%
25%
IRR
20%
15%
10%
5%
0%
1993- 2000- 2004
1999 2003
Source: Preqin quarterly infrastructure update Q1 2014
2005
2006
2007
2008
2009
2010
Vintage year
Past performance does not guarantee future results, which may vary
47
Private Infrastructure Equity
Historical Returns
IRR comparison to other private equity investments
30%
Infrastructure
25%
Buyout
Venture Capital
IRR
20%
15%
10%
5%
0%
-5%
1993- 2000- 2004
1999 2003
Source: Preqin quarterly infrastructure update Q1 2014
2005
2006
2007
2008
2009
2010
Vintage year
Past performance does not guarantee future results, which may vary
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Private Infrastructure Equity
Value Drivers for an Insurance Investor
Stable underlying cash flows
Lower volatility than listed equity
Operational performance and incentives
Private structure suited to long-term investments
49
Equity – Conclusion
Private infrastructure equity investments have
historically achieved comparable IRRs to other PE
Inexpensive debt financing levels make infrastructure
equity investments attractive
Infrastructure equity may complement a with-profits
portfolio of listed equity
eq it
50
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Conclusion
51
Conclusions
1
2
3
4
Global infrastructure investments needed to sustain
growth
Annuity funds – long-term debt, no prepayment
With-profits funds – more flexibility
Infrastructure debt valuations have become expensive
L kb
Look
beyond
d private
i t European
E
infrastructure
i f t
t
debt
d bt
Value in infrastructure equity
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Questions?
53
General Disclosures
Market data and positions as of May 2014
This material is provided at your request for informational purposes only. It is not an offer or solicitation to buy or sell any securities. THIS MATERIAL DOES NOT
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are current as of the date of this presentation and may be subject to change, they should not be construed as investment advice
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